New Tax-Free Accounts for the Disabled-ABLE Act authorizes state programs

When the Tax Increase Prevention Act of 2014 (TIPA) was passed late last year, most of the attention was directed at the long list of extenders that were included in the new law, many of them retroactive to the beginning of 2014. But another piece of legislation attached to TIPA has “flown under the radar” thus far. Significantly, the Achieving a Better Life Experience (ABLE) Act authorizes the individual states to establish tax-free savings accounts for disabled individuals.

As of this writing, the Treasury Department is expected to issue new regulations governing ABLE accounts midway through the year. This should enable some states to get their programs up and running near year-end.

Background: ABLE accounts are designed to resemble Section 529 accounts used for higher education. As with 529 plans, contributions to the plan are made to an account designated for a qualified individual. And, just like a 529 plan, the earnings inside the account and distributions for “qualified expenses” are completely tax free. Qualified expenses must be related to the beneficiary’s needs, including housing, education, transportation, employment training and support, technology used for assistance, personal support services, health care expenses, financial management and administrative services, expenses for monitoring and oversight, and funeral and burial expenses.

But the rules for eligibility are strict. To qualify to use an ABLE account, an individual must be either blind or have experienced another severe disability before the age of 26. Thus, these accounts are not available to a sizable segment of the population that is disabled.

If a disabled individual meets the requirements and is receiving Supplementary Security Income (SSI) and Medicaid benefits, or either one, he or she is eligible to participate. (Note that the funds inside the ABLE account do not count toward the limits on personal assets for these public benefits.) If the assets in the account exceed $100,000, the beneficiary’s SSI benefits will be suspended until the total drops below this threshold. However, Medicaid eligibility will not be affected by the account’s amount.

Who can contribute? It can be anyone from the disabled individual to a family member or friend. But the annual limit for contributions from all sources is $14,000. This limit is tied to the annual gift-tax exclusion and is indexed annually for inflation. Also, the total limit on contributions that can be made to an ABLE account over time is the same as the applicable state’s limit on Section 529 accounts (with certain modifications). In most states, this limit is well into six figures.

In some cases, an ABLE account may be used to supplement a special-needs trust, but such trusts may offer more flexibility than an ABLE account. Consider all the implications for your personal situation.

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